Monday, 13 July 2015

The Constitutional Court handed down judgment on 18 June 2015 in the
case of the South African Reserve Bank
and Minister of Finance v Mark Shuttleworth regarding the nature of the
exit levy paid by Mr Shuttleworth to export capital from South Africa. That court
also dealt with the broad discretionary powers conferred on the Minister of
Finance to regulate the exchange control system of the country.

During 2001 Mr Shuttleworth emigrated to the Isle of Man on the basis
that he wished to free up his funds for investment outside of South Africa. At
that stage the Exchange Control Regulations did not permit Mr Shuttleworth to
transfer his assets from South Africa. He applied to the South African Reserve
Bank (“the SARB”) to transfer an amount of approximately R2.5 billion out of
South Africa and the SARB agreed thereto on the basis that he was required to
pay a so-called exit charge of 10% of that amount.

Mr Shuttleworth accordingly
paid the exit levy of approximately R250 million and was later advised that the
exit charge was a tax and had been imposed in a manner not permitted by the
Constitution. Before the matter reached the Constitutional Court, the dispute
was dealt with by the North Gauteng High Court and subsequently the Supreme
Court of Appeal.

The High Court held that the exit charge was lawfully imposed
and also decided that a few exchange control legislative provisions were
unconstitutional. Subsequently, the Supreme Court of Appeal held that the levy
paid constituted a tax and was therefore unlawful and should be refunded.

As a result of the fact that both parties to the case were dissatisfied
with the decision of the Supreme Court of Appeal, the case was heard by the
Constitutional Court, which delivered its judgment on the matter on 18 June
2015.

After the first democratic election in South Africa in 1994, the process
of relaxing of the exchange control rules started. During 2003 the Minister of
Finance reached the conclusion that the economy had become more resilient and
decided that it was appropriate to commence with the relaxation of exchange
controls previously in force.

The Minister confirmed that holders of blocked
assets would be required to apply to the Exchange Control Department of the
SARB to remit such funds and that approval would be subject to an exiting
schedule and that an exit charge of 10% of the amount to be remitted would be
payable. The Constitutional Court reached the conclusion that the decision to
impose the 10% exit charge on persons wishing to export more than R750,000 was
a decision made by the Minister and not the SARB.

The court stated that the Minister of Finance exercised the power to
impose the levy in terms of regulation 10(1)(c) of the Exchange Control
Regulations and imposed two conditions on persons wishing to remove funds from
South Africa, namely, that they pay a 10% exit charge on the capital exceeding
R750,000 and that the capital exported be subject to an existing schedule. Moseneke DCJ reached the view that the SARB was only responsible for
implementing the policy decision made by the Minister of Finance and that it
had no discretion when giving effect to his decision. The Supreme Court of
Appeal had held that the exit levy constituted a tax and in light of the fact
that it had not been introduced by way of a Money Bill in accordance with
section 77 of the Constitution the levy was unlawful.

The court made the point that the government is not entitled to levy a
tax or appropriate public money without due process and the express consent of
public representatives and proceeded to analyse the provisions of section 77 of
the Constitution and particularly the meaning of “national taxes, levies,
duties [and] surcharges”. The court made the point that the fact that a charge
or levy may be referred to as a tax does not imply that it must beintroduced with compliance with the
requirements of section 77 of the Constitution.

Moseneke DCJ reached the view that the exit charge was not aimed at
raising revenue but that its purpose was to restrict the scale of capital
exported from South Africa. Furthermore, the exit charge did not apply to the
general population of the country but only to those persons who wish to
externalise capital in excess of R750,000. The court recognised that the exit
charge generated revenue of some R2.9 billion for the government but reached
the view that the garnering of income by the Treasury was secondary to the
primary purpose of regulating and discouraging the export of capital from South
Africa.

Ultimately the court therefore decided that the exit charge paid by Mr
Shuttleworth was not one which fell within the constraints set out in the
definition of a Money Bill in the Constitution. The court was also required to
deal with the delegation of legislative power and whether plenary legislative
powers had been assigned to the President.

The court reached the conclusion
that the President did not delegate legislative power but that the power he had
was to regulate by way of imposing conditions for the export of capital. The
court took account of the particular circumstances regarding the movements in
foreign currency and the possibility of funds being moved from one location to
another and the need for special regulation thereof.

The court accepted that
the nature of the power which the Currency and Exchanges Act, No. 9 of 1933,
conferred on the President to make regulations relating to currency is
unusually wide but that was justified taking account of the unusual
circumstances of the subject matter. The court therefore held that the exit
charge paid by Mr Shuttleworth did not constitute a tax and it had been
lawfully imposed.

The court also had to deal with an application filed by Mr Shuttleworth
seeking leave to cross-appeal the decision of the lower court refusing to
impugn the constitutional validity of all or some of the provisions regulating
exchange control in the country.

The court decided that it was not in the
interests of justice to grant Mr Shuttleworth leave to cross-appeal against the
decision of the Supreme Court of Appeal on the broad constitutional attack
against the exchange control regulations.

Despite the court’s conclusion,
Moseneke DCJ made the point that the specific provisions targeted by Mr
Shuttleworth “are well and truly archaic and may very well be at odds with the tenets
of our Constitution. The state parties are nudged to take appropriate steps to
review the provisions in issue.”

Mr Shuttleworth also sought to impugn section 9(1) of the Currency and
Exchanges Act and regulation 10(1)(c). The High Court had dismissed Mr
Shuttleworth’s contention and Moseneke DCJ agreed with the view reached by that
court that South Africa’s “exchange control system requires a flexible, speedy
and expert approach to ensure that proper financial governance prevails”.

In the result the court held that regulation 10(1)(c) of the Exchange
Control Regulations was valid. Thus, the Constitutional Court held that the
exit levy paid by Mr Shuttleworth was lawfully imposed and this puts paid to
the SARB having to make a refund to Mr Shuttleworth and indeed any other
persons who paid the levy upon exporting capital from South Africa.

It is interesting to note that Froneman J did not agree with the
conclusion reached by Moseneke DCJ and therefore handed down his own dissenting
judgment. Froneman J reached the view that the exit charge raised revenue for
the national government and reached the conclusion that it could therefore only
be imposed by way of original legislation passed by Parliament. Froneman J
therefore reached the conclusion that the imposition of the exit charge by
announcement in Parliament was constitutionally invalid.

The decision of the Constitutional Court brings finality to the
Shuttleworth saga which has been underway for a number of years and it is clear
that the exit levy imposed on the export of capital was, in the view of the
court, lawfully imposed. The Minister of Finance indicated in his 2015 Budget
Speech that the SARB is in the process
of simplifying the Exchange Control Manual and plans to finalise that during
2015. It is hoped that the SARB will
take heed of the court’s views on the provisions contained in the Exchange
Control Regulations and that those provisions will be reviewed to take account
of the Constitution.

Dr Beric Croome is a Tax Executive at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, July 2015.